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By D
19/07/2011

Short of Money but Not Short of Rent

Christina Sharples v Places for People Homes Ltd, Stephen Godfrey v A2 Dominion Homes Ltd [2011] EWCA Civ 813

This is actually two appeals which deal with an important question about insolvency and bankruptcy and whether monies that form part of the bankruptcy can be counted as arrears of rent for the purposes of obtaining possession.

Facts
Both Ms Sharples and Mr Godrey were assured tenants of their respective landlords and both were in arrears of rent. Ms S had possesion proceedings commenced against her but these were adjourned generally on condition she made monthly payments. She failed to do so but then declared bankruptcy prior to the reinstated proceedings being heard. Mr G had a Debt Relief Order (DRO) approved by the Insolvency Service prior to the first hearing of his landlord’s claim for possession for arrears of rent.

In the case of Ms S it was argued at first instance that s285(3) of the Insolvency Act 1986 precluded the making of an order against her in respect of arrears that formed part of her bankruptcy. For Mr G it was argued that proceedings against him should be stayed due to the DRO. Both arguments failed and possession orders were made, Mr G’s being suspended on condition that he paid the future rent and a regular sum toward the arrears. The tenants duly appealed, their cases being consolidated in the Court of Appeal.

Sharples
The Insolvency Act protects the property and estate of a bankrupt from action being levied against it. The bankrupt is required to deliver all his (or her in this case) estate up to the trustee in bankruptcy and it then vests in the trustee. Assured tenancies are exempt form this provision in part and will not vest in the trustee unless the trustee specifically serves notice vesting the tenancy in himself.

Ms S’ appeal turned on two specific pieces of legislation. First on the wording of s285 Insolvency Act 1986 which reads (so far as is relevant):

(3) After the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of a debt provable in the bankruptcy shall –
(a) have any remedy against the property or person of the bankrupt in respect of that debt, or
(b) before the discharge of the bankrupt, commence any action or other legal proceedings against the bankrupt except with the leave of the court and on such terms as the court may impose.
This is subject to sections 346 (enforcement procedures) and 347 (limited right to distress).
(4) …
(5)….
(6) References in this section to the property or goods of the bankrupt are to any of his property or goods, whether or not comprised in his estate.

and Ground 8, Schedule II, Housing Act 1988 which reads:

Both at the date of the service of the notice under section 8 of this Act relating to the proceedings for possession and at the date of the hearing
(a) if rent is payable weekly or fortnightly, at least eight weeks rent is unpaid;
(b) if rent is payable monthly, at least two months rent is unpaid;
(c) if rent is payable quarterly, at least one quarter’s rent is more than three months in arrears; and
(d) if rent is payable yearly, at least three months’ rent is more than three months in arrears;
and for the purpose of this ground “rent” means rent lawfully due from the tenant.

It was contended for Ms S that s285(3)(a) precluded the granting of a possession order as this would be a remedy granted to the landlord in respect of the debt covered by the bankruptcy and the Assured tenancy was clearly property protected by that sub-section. Further, Ground 8 was not made out as no rent was ‘lawfully due’ from the tenant, in fact no rent was due at all. Finally, there was a public policy argument in favour of protecting Assured tenants from being made homeless where they had declared bankruptcy in respect of their debts and this was surely the entire point of the IA.

The Court of Appeal disagreed and held that the making of a possession order was not in fact a remedy precluded by the IA. Three key principles were set out:

First, the grant of a tenancy, including an assured tenancy, creates a property interest in the tenant which is an incumbrance on the landlord’s title. An order for possession is a remedy which restores to the landlord full proprietary rights, including rights of occupation and letting, in respect the property. Secondly, the failure to pay rent is a breach of a contractual obligation. Neither forfeiture, nor a court order for possession, nor recovery of possession by the landlord, nor an order for bankruptcy, eliminates the personal indebtedness constituted by the rent arrears. Thirdly, it follows, as a matter of general principle, that an order for possession of property, whether let under an ordinary contractual tenancy or a secure tenancy or an assured tenancy, is not a remedy “in respect of” the debt represented by the rent arrears which gave the landlord an entitlement to the order for possession.

It followed from these principles that a possession order was not a remedy in respect of the debt because it was not designed to enforce payment of the debt which is what the IA was actually intended to prevent. It was a remedy in respect of the property by allowing the landlord to free himself of the incumbrance of the tenancy. The public policy argument of maintaining the right of Assured tenants to stay in their home was given careful consideration but it was felt by the Court that this was a matter for housing legislation and the careful balance struck in that legislation should not be upset by legislation designed to deal with personal insolvency.

Godfrey
Many of the same arguments were adopted for Mr G but his case was said to be stronger because the wording of s251G, IA 1986 (which deals with DROs) is not qualified as s285 is because it prohibits any remedy in respect of the debt rather than limiting it to the property and person of the bankrupt. Furthermore the order against Mr G did not rely on the mandatory Ground 8 but on a discretionary ground for possession, Ground 10.
However, the reasoning that the Court had followed in dealing with Ms S was relatively simply extended to deal with Mr G. However, it was wrong for the order to be suspended on condition that payments were made toward the arrears as this would offend against the insolvency legislation as regards past indebtedness for reasons which are outlined above.

Summary
I have adopted the Court’s excellent summary of its findings:

(1) an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of arrears of rent, which are provable in the bankruptcy of the tenant, is not a “remedy … in respect of that debt” within IA s. 285(3)(a);
(2) that is so, whether the order is an outright order for possession or is a conditional suspended possession order;
(3) IA s.285(3)(b) is implicitly limited to legal proceedings against the bankrupt “in respect of that debt”; that is to say, it is qualified in the same way as IA s.285(3)(a);
(4) accordingly, proceedings for an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of rent arrears, in which no claim is made for arrears provable in the tenant’s bankruptcy, are not subject to the automatic stay in IA s.285(3)(b);
(5) an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of arrears of rent, which are the subject of the tenant’s DRO, is not a “remedy in respect of the debt” within IA s. 251G(2)(a), whether the order is an outright order for possession or is a conditional suspended possession order;
(6) proceedings for possession of property subject to an assured tenancy on the ground of rent arrears, which are provable in the tenant’s bankruptcy or are the subject of the tenant’s DRO, should not normally be stayed under IA s. 285(1) or (2) or IA s. 251G(3);
(7) on the hearing of such proceedings, no order can be made for payment of such arrears; nor should a suspended order for possession be made conditional on payment of such arrears, but it should be made conditional on payment of any other arrears (i.e. those not provable in the bankruptcy or subject to the DRO) and current rent.

So the appeal of Ms S was dismissed and Mr G’s suspended order stayed in force but was varied so that he did not have to make payments to the arrears of rent. Given the current economic conditions this decision is likely to have wide consequences and will cause disappointment to many tenants and relief to their landlords.

D is a solicitor specialising in landlord and tenant matters with a London firm.

21 Comments

  1. J

    I’m not so sure I agree with your last point – yes, it’s good news (if you’re a landlord) that a possession order can still be made, but, if the order is suspended/postponed, then the suspension/postponement can only be on terms of payment of the current rent and NOT the arrears. Doesn’t this rather mean that landlords lose the arrears (which could be very significant sums of money)?

    Reply
    • David Smith

      Fair point. I am not sure though that a lot of this money is ever actually collected anyway.

      Where this case is more intriguing is where it could be taken. For example, say I forget to pursue a tenant fro rent arrears for six years. I cannot then go to court for the money because of limitation. However, the debt is still owed, it is just not enforceable. Therefore, I could presumably still sustain a case for possession?

      Reply
      • J

        I suspect you’ll find that most RSL/PRPSH arrange their borrowing on the basis that the arrears will, eventually, be paid. If that is no-longer true, then I can well imagine problems developing.

        Reply
        • kjetilniki

          when a rent ground is made out, the point in respect of a SPO for current rent is that where the tenant had failed to manage to pay rent (depending upon quantum and circumastances) it is likely to be reasonable for a limited period to have a sanction for non payment of future rent.

          As I see it the effect of Sharples is
          A.Bankruptcy petition pre issue (s285(1)&(2))
          1 the court may stay claim for rent arrears or other financial claim against the tenant
          B.Bankrupt pre issue
          1. No money claim may be made without leave of the court except in respect of post bankruptcy debts — s285(3)(b)
          2. Ground 8 (AT) (hearing element)cannot be satisfied except in respect of post bankruptcy rent arrears
          3. Ground 10 (AT) cannot be satisfied except in respect of post bankruptcy rent arrears
          4. Ground 1 (ST.) (Re rent arrears) cannot be satisfied except in respect of post bankruptcy rent arrears
          5 ground 1 (RT) (Re rent arrears) cannot be satisfied except in respect of post bankruptcy rent arrears
          6. (I make no comment re the agricultural sector).
          C.Bankruptcy petition post issue (s285(1)&(2)
          1 the court may stay claim for rent arrears or other financial claim against the tenant
          D.Bankrupt post issue pre dispositive hearing
          1. money claim except in respect of post bankruptcy debt must be dismissed? s285(3(b)
          2 ground 8(AT) cannot be satisfied re date of hearing element except in respect of post bankruptcy rent arrears
          3 grounds 10(AT), 11(AT), 1(ST)(Re rent arrears), 1(RT) (Re rent arrears) can be satisfied by both pre and post bankruptcy rent arrears but any Suspended Possession Order cannot be made to include payment of pre bankruptcy debts.
          E.Bankrupt post possession order
          1 what should happen re any suspended possession order?
          2 any warrant of execution re the money judgment and costs or would have to be stopped s285(3)(b) ? Application for charging order
          Debt Relief Order
          F.debt relief order pre issue
          there is no substantive difference in effect from a bankruptcy order
          G.debt relief order post issue pre dispositive hearing
          there is no substantive difference in effect from a bankruptcy order
          H.debt relief order post possession order
          there is no substantive difference in effect from a bankruptcy order

        • kjetilniki

          on reflection
          section D3 should be amended re ground 10(AT), 1(ST)(Re rent arrears), 1(RT)(Re rent arrears)to show that it must be satisfied by prebankruptcy arrears.

  2. D

    I have no problem with (1) – (6).

    What I do have a problem with is (7). I simply cannot see what the point is in having a suspended possession order on terms of future rent continuing to be paid (and sometimes contributions towards court costs). The whole point in the courts granting suspended possession orders is that the tenant is given an opportunity to ‘put right the wrong’ and to be allowed to remain in the property on condition that he/she does so.

    I think (7) also doesn’t address the wider housing policy implications too. Enough people have difficulty in obtaining privately rented properties as it is with landlords frequently carring out CRB checks and refusing to accept HB. I can only see a judgment such as this making matters worse.

    Finally , how will (7) impact on the issue of intentionality for HPAs if a private landlord (somewhat understandably) has enough and uses a s21 notice to evict a tenant who only continues to pay his future rent as ordered to do so?

    Reply
  3. Barry Marlow

    So, let’s get this right. Is this saying that no landlord can collect arrears if they are listed in insolvency? All social landlords will be writing-off tens of thousands?

    Reply
    • Jimmy E

      I’m still trying to get my head round this aspect of it too.

      Am I right in thinking that the arrears should NOT be written off, as for as long as they remain in existence, the Landlord has a ground to bring proceedings for possession (albeit not to have the arrears repaid), regardless of whether post-bankruptcy/DRO rent is being paid?

      Going on from that, can the continued existence of the pre-bankruptcy/DRO arrears be used as an effective stick to beat the tenant into making “voluntary” payments from their surplus income to clear the arrears, for fear of being faced with possession proceedings based on them?

      Reply
      • bm

        Yes. And yes. I think.
        Brief update on the possibility of SC appeals from this decision. Mr Godfrey has (I understand) been granted funding to pursue an application for permission to the SC. Ms Sharples is still yet to obtain such an extension to her LSC certificate…

        Reply
  4. Stephen O'Neill

    The Insolvency Service guidelines states Rent arrears being paid under an Suspended Possession Order should be an allowable expense” and goes on to point out that where a possession order is threatened “[if there is] evidence of an agreement to repay the arrears by instalments this would ordinarily be an allowable expense.”

    I understand both parties are seeking permission to appeal in the Godfrey case.

    Reply
    • Dave Love

      Hasn’t that section been removed? And replaced with ‘A debtor should seek their own independent advice as to their position regarding payment of any rent arrears.’

      Reply
      • Fiona T. Wardle

        …yes it has (this being in relation to Guidance issued by the Insolvency Service to Approved Intermediaries in respect of Debt Releif Orders, and has little/no bearing on any Insolvency Service guidance with regards to bankruptcy).

        Reply
  5. bm

    Ms Sharples sought PTA from the Court of Appeal but her application was refused.

    Reply
  6. Alex

    I can see housing associations obtaining outright possession orders under ground 8, and then agreeing privately with the bankrupt tenant not to enforce the order so long as the tenant pays rent + £3.50/week towards the arrears(or whatever).

    What I’m wondering is whether, in this scenario, the housing association would be guilty of blackmail.

    Reply
    • kjetilniki

      in the case of NOTICE & bankruptcy/dro pre issue ground 8 will not be satisfied as at hearing unless 8 weeks etc of post dro-bankruptcy rent are due at hearing date.
      where dro/bankruptcy post dates issue, ground 8 will not be satisfied as at hearing unless 8 weeks etc of post dro/bankruptcy rent are due at hearing date.

      Reply
  7. Stephen O'Neill

    I wonder whether a clause in a tenancy agreement requiring payment of rent plus something towards the accrued arrears would be enforceable by way of an order for specific performance (an equitable remedy) regardless of a DRO.

    Reply
  8. kjetilniki

    there are no arrears due from the tenant. how r u going to word this?

    (2)During the moratorium, the creditor to whom a specified qualifying debt is owed—(a)has no remedy in respect of the debt, and(b)may not—(i)commence a creditor’s petition in respect of the debt, or(ii)otherwise commence any action or other legal proceedings against the debtor for the debt,except with the permission of the court and on such terms as the court may impose.(3)If on the effective date a creditor to whom a specified qualifying debt is owed has any such petition, action or other proceeding as mentioned in subsection (2)(b) pending in any court, the court may—(a)stay the proceedings on the petition, action or other proceedings (as the case may be), or(b)allow them to continue on such terms as the court thinks fit.

    I expect it would also fall foul of the unfair terms regs

    Reply
  9. Brian Hitchcock

    So what are the post-bankruptcy arrears?

    If there are £500 arrears at the date of the bankruptcy and next week rent of £70 falls due and the tenant pays £70, is the payment attributable to the pre-bankruptcy arrears or the newly falling due rent?

    My recollection from when I was a banking lawyer is that the general rule is first in, first out. That is, the oldest items of account are paid first.

    If so, every post-bankruptcy payment reduces the pre-bankruptcy rent arrears – which remain payable even if the tenant cannot be compelled to pay them – and leaves the post-bankruptcy rent unpaid until all the pre-bankruptcy arrears are paid off.

    The first in, first out rule was as I recall subject to appropriation by the payer or failing that, by the payee.

    The well-advised bankrupt tenant might want to specifically state when paying rent post-bankruptcy that the payment is to be appropriated to the post-bankruptcy rent.

    Though how that would work in respect of housing benefit is beyond me to understand, particularly where the local authority is the landlord and there is no question of the housing benefit ever being paid to the tenant.

    Reply
    • Alex

      Presumably with housing benefit the matter would be even simpler as housing benefit is only payable in respect of ongoing rent – a local authority tenant is statutorily entitled to a rent rebate and the local authority could not lawfully apply the tenant’s housing benefit entitlement for another purpose (i.e. to repay pre-bankruptcy arrears).

      Reply
  10. Chris Lowry

    Your summary, whilst very intuitive as usual, misses the point for me and many of my clients. We sort of already knew that bankruptcy did not prevent a possession order (because the dreaded and much troublesome Harlow v. Hall said so.)

    However we were running a case for a tenant where a large RSL (who shall remain nameless for the moment) was arguing (at disproportionate expense) that they were entitled to a payment off the arrears, all of which were subject to the tenant’s bankruptcy. The judge was inclined to agree until the judgment in Sharples in Paragraph 7 of the summary . We argued that s285 (3) applied and thankfully Sharples agreed.

    So what? you may ask. Well hundreds of tenants in our locale who had either gone bankrupt or got involved in a DRO were being denied their reasonable preference under s167, because of ‘rent arrears’. Needless to say that the RSL has caved in now and have agreed an order that possession be suspended on rent only payments.

    So well done Court of Appeal for clearing that up for our local judges, some of whom seem to want to make their own law according to their local prejudices!

    Reply
  11. Sian Ferguson

    . . . I can already hear the stampede of RSLs banging out NOSPs the minute a tenant falls foul of Grounds 10 and 11. Counting down the weeks until they can issue possession proceedings and at least minimise the amount of rent arrears accrued. County Court Possession Day is going to get a whole lot busier. . .

    Reply

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